What Happens to Your Money in the Bank During a Recession?

A recession is a period when economic activity slows, leading to declines in output, employment, and income. During such times, concerns about the safety of money held in banks are common. The U.S. banking system has multiple layers of protection to maintain stability and protect deposited funds, even during economic stress.

Understanding Deposit Insurance

Deposit insurance, provided by the Federal Deposit Insurance Corporation (FDIC), is a foundation of financial stability and depositor confidence in the United States. The FDIC is an independent U.S. government agency that protects money placed in FDIC-insured banks. This insurance covers eligible deposit accounts at no cost to the account holder.

FDIC insurance covers various deposit accounts, including checking accounts, savings accounts, money market deposit accounts (MMDAs), and certificates of deposit (CDs). The standard insurance amount is $250,000 per depositor, per insured bank, for each ownership category. Multiple accounts at the same bank are aggregated under your ownership category for this limit.

Different ownership categories allow for higher coverage. Funds in a single ownership account are insured separately from those in a joint account or certain retirement accounts. For example, a joint account with two owners is insured up to $500,000 ($250,000 per co-owner). Self-directed retirement accounts, like IRAs, are also insured separately up to $250,000 per depositor at each insured bank.

If an FDIC-insured bank fails, the agency ensures depositors access their insured funds quickly, often within a few business days. This is done by providing a new account at another insured institution or by issuing a check. The FDIC’s system, funded by assessments on insured banks, protects millions of depositors.

Accounts Not Covered by Deposit Insurance

While deposit accounts at FDIC-insured banks are protected, not all financial products offered by banks are covered by FDIC insurance. Investment products carry market risk and differ from traditional deposits, and their protections differ significantly from deposit insurance.

Money market mutual funds (MMMFs) are often confused with money market deposit accounts (MMDAs). Unlike MMDAs, which are FDIC-insured bank products, MMMFs are investment vehicles that pool money to purchase short-term debt securities. Regulated by the Securities and Exchange Commission (SEC), MMMFs are not FDIC insured; their value can fluctuate, with no guarantee against loss.

Brokerage accounts also fall outside FDIC coverage. These accounts hold investments such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). The value of these investments can increase or decrease based on market performance, and FDIC insurance does not protect against these market fluctuations or investment losses.

Instead, brokerage accounts typically receive protection from the Securities Investor Protection Corporation (SIPC). SIPC protects customers against the loss of cash and securities held by a brokerage firm in the event the firm fails. SIPC protection covers the return of a customer’s securities and cash if the brokerage firm goes out of business, not against a decline in value due to market performance. Other investment products sold by banks, such as annuities, are also not FDIC insured.

How Banks Operate During Economic Downturns

Banks operate within a highly regulated environment designed to ensure their stability, particularly during economic downturns like recessions. Regulatory bodies, including the Federal Reserve and the Office of the Comptroller of the Currency (OCC), oversee bank operations. These regulators set capital requirements, mandating that banks hold a certain amount of capital relative to their assets, acting as a buffer against potential losses.

Banks also manage their liquidity, maintaining sufficient cash and easily convertible assets to meet customer withdrawal demands. Regulatory stress tests simulate severe economic scenarios to assess a bank’s ability to withstand financial shocks. These tests help identify potential vulnerabilities and ensure banks have adequate capital and liquidity to continue lending and operating.

During a recession, central bank actions, such as adjustments to interest rates, can influence the broader economic environment and the rates banks offer on deposits and loans. Lower interest rates are often implemented to stimulate economic activity, which can affect the yield on savings products. The regulatory framework and the industry’s focus on maintaining strong capital and liquidity positions work together to foster confidence.

The banking system is built with multiple safeguards to maintain public trust and prevent widespread failures, even amidst severe economic challenges. These measures aim to ensure that banks remain stable institutions capable of supporting the economy. This systemic resilience helps to protect the funds held by individuals and businesses, providing a stable foundation during uncertain economic times.